Be a Financial Doomsday Prepper!

Have you ever seen this show on National Geographic Channel: Doomsday Preppers? It is quite entertaining. Families in rural United States prepare for some sudden and catastrophic calamity such as a super-volcano eruption, nuclear disaster or polar shift. They build underground shelters and stock up on canned food, water and plenty of guns and ammo.

Personally I don’t think we will see a cataclysmic shift of the poles anytime soon, but I do believe that we should prepare for tough times ahead. And as investors, we will do well to look at the bigger picture shaping the future of our economy. In a nutshell, we are currently depleting the earth’s assets – our natural capital – while counting this as GDP growth. From an accounting point of view, this doesn’t make sense and it is not sustainable. It is like cutting down all the trees in your garden, and then think you get richer that way.

In The End of Growth: Adapting to Our New Economic Reality (2011), Richard Heinberg lists three reasons why conventional economic growth cannot go on forever with business as usual:

Depletion of easy-to-reach natural resources

Environmental constraints and pollution, and finally:

Systemic financial and monetary failures.

In my view, we can continue to extract most of the resources we need, although this is becoming more and more expensive to the point where much of the work going on is what the economists call counterproduction. For instance, fuel made from plant ethanol often requires more energy as input as the energy finally produced! In this region, although much of the forest clearance and mining operations fuelling the economies in our neighbouring countries are not sustainable, they can probably go on for a while longer.

Pollution and environmental degradation can also go on for much longer before we hit the wall; at least in the developed world (here including Singapore) where we have the infrastructure to deal with it. Locally, in places like sub-Saharan Africa, the Middle East, southern Asia and South America, we are likely to see overpopulation, pollution and poverty (exacerbated by climate change) lead to social collapse and migration much quicker; in many places including nearby Philippines this process has already started. This will most likely be a train wreck in slow motion, playing out over the coming decades. However, it is the third factor that is likely to hit us pretty soon.

Since the financial crisis in 2007-2009, governments around the world have avoided a recession through monetary policies involving ultra-low interest rates; in Europe the rates are negative, the ECB (European Central Bank) currently charges depositors -0.4% pa[1], which is unheard of in 2,000 years of human development! The expansion of the M2 (the broader money supply) and quantitative easing, i.e. asset purchasing programmes by central banks in all the major economies, are all associated monetary tools. On the fiscal side, every major government in the world today spend more than they take in. Even Asian powerhouse China is mainly just growing its economy on borrowed funds and borrowed time, as highlighted in a recent report from the IMF. [2]

We all know this, and we all know that it cannot go on. What we don’t know is: What will happen when the music stops? Nobody can explain that, but if you listen to independent financial analysts, such as Marc Faber or Peter Schiff, it will end badly. With its open society and trade-dependent economy, Singapore will not be immune from these issues.

Heinberg and Faber and Schiff could be wrong, everything might work out just fine. We might find a way through technology of growing the economy forever. And maybe ‘deficits don’t matter’; maybe the $217 trillion world debt[3] will just somehow go away. In any case, we can just sit back and wait for the government to help us, right? With large financial reserves and strong institutions, Singapore is better equipped than most countries to deal with financial shocks. No, not so! In my view, this is not good enough. Each one of us as individuals is responsible for what happens to us. Our ability to influence macroeconomic events and national policies is near 0. But we can and should position ourselves to weather the impending environmental, financial and possibly social storm that is brewing.

So just in case that the contrarians are right, even if it is a remote possibility, that this will end badly, I would advise you to arrange yourself carefully for the future, to be a ‘financial doomsday prepper’:

Now is not the time to get into more debt. The financial experts out there don’t agree on many things, but they do agree that if and when another financial crisis hits, it will be highly leveraged companies and individuals – as well as the poor in general – who will suffer the most; so don’t be among those! As they say: The best thing you can do for the poor is not to be one of them!

Control your spending; this site has plenty of advice on how to do just that. And then, what do you do with the money you save this way? You build up capital, resilience, financial muscle if you like. Keep some emergency funds in cash, at least six months worth of expenses, a year’s worth is better.

But apart from that, invest in quality tangible assets that can withstand a recession. First of all, max out your CPF special account. The 4% pa risk-free rate you get there might look good during the next crisis. When that crisis hits home, all asset classes are likely to drop; just like they all have been rising steadily recently, fuelled by the monetary expansion. But if you have a diversified allocation of stocks in well-managed index-linked private companies, as well as some bonds and precious metals, you can ride out the downturn and come out in a decent shape. If you are not comfortable picking individual stocks, consider some of the many low-cost exchange-traded funds available these days, and use those instruments to gradually build up a recession-resistant portfolio.

Morten Strange

Morten Strange is a Singapore-based financial analyst and writer and the author or Be Financially Free: How to become salary independent in today’s economy (Marshall Cavendish, 2016; reprinted with updates 2017).